So, you’ve submitted your Purchase and Sale Agreement and are in the thick of the due diligence process. While you’re leaving no stone left unturned, know there’s more to watch out for when it comes to uncovering liens against the property. 

Here are the important facts to know for any net lease property before the close of escrow.

Liens

First off, let’s get back to the basics and breakdown how it works. Two examples in which a default in payment could result in an involuntary lien are failure to pay property tax and construction work.

In this blog post, we are referring to the scenario when an unpaid contractor submits a lien against the property, which is utilized as collateral for the debt owed.

Who can submit a lien? 

Anyone who furnishes labor, materials, services, fixtures, or tools has the right to file a lien under the proper circumstances. Typically, the required timeframe for submitting a lien is 90 days, but it may vary based on state requirements.   

The claimant enforces the lien by sending a copy of the filed lien via certified mail to the property owner and lender (if applicable). If payment continues to remain unpaid, the foreclosure lawsuit process may commence. 

Why do liens occur?

As mentioned, liens may be a result of non-payment from a property owner to a contractor. However, non-payment does not only come as a result of owners wishing to stiff workers. It can arise from disputes such as dissatisfaction of work quality, discrepancies with design or materials used, an extended timeline, or construction errors.   

How do you know if there’s a lien?

As a potential owner of a property, one of the top items you’ll want to check is whether there is an existing lien from a previous owner. A couple of ways you can gain peace of mind are to check the current property owner’s name on the respective county recorder’s official record search online or visit the county’s clerk office. 

Also, keep in mind lenders will file a UCC-1 financing statement when there is a lien on the property of a debtor. Here’s a list of a few states’ free lien searches: Alaska, Arizona, Colorado, Florida, Iowa, Massachusetts, New Mexico, New York, North Carolina, Ohio, Oregon, and Rhode Island.

How can a lien be removed? 

The title company may require a document that is often difficult to obtain, such as evidence of probate or release of lien. The lien cancellation differs from a lien waiver as it comes into play after a lien has already been filed, rather than acting as an instrument to renounce lien rights. 

It is the burden of the lien holder to provide a signed, notarized release stating that the title company will need to record in order to remove the lien. 

Tips for Protection

During Title Examination

First of all, an experienced real estate attorney should be employed to search the legal chain of title. The search typically investigates the property’s last 30 years of ownership and whether the prior owners placed any restrictions on the property that impact future uses.  

For example, this could reveal an imposed judgment or easement, which would constitute an encumbrance.  

Seller’s Proceeds

You can request the seller pay off any documented judgements or liens that encumbered the title at the closing. If the seller agrees to pay the concessions, you can possess the title free of any prior owner-related liabilities.  

Lien Release Bonds

The amount of a bond for a lien release is dependent on the state’s requirements. For example, in California, 125% of the lien amount must be satisfied, while the amount is 150% in Arizona. 

So before you close on a commercial property, be sure to dive deeper during the due diligence period to avoid any previous owners’ liabilities and use these pointers for protection. 

FOR tips ON avoiding liens after the close of escrow, cHECK OUT:

Commercial Liens Part II: How to Avoid After the Close